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Dual Class Shares: To Allow Or Not To Allow?

by Marc Moore 25th June 2019

Dual class shares give select investors disproportionate voting power within a company. Should they be allowed?

Dual class share structures have spread exponentially in recent years across much of the corporate world. Dual class listed companies today account for around $4 trillion of US total stock market value including 9% of the S&P 100, and the dual class share phenomenon has become one of the most significant issues in global corporate governance today.

In essence, a dual class share structure is one that gives certain ‘inside’ investors voting rights disproportionate to their economic interest in a company. This enables them to prevail over less privileged ‘outside’ investors on any important shareholder vote, including the important question of who sits on the company’s board of directors. The standard dual-class share structure is for super-voting shares to carry 10 votes each, with ordinary shares carrying only one vote each. For example, Facebook’s 10:1 weighted dual class structure enables its founder, Mark Zuckerberg, together with a small group of inside associates to exercise majority voting control despite having only a 15% economic interest in the firm.

In the case of Google, meanwhile, Larry Page and Sergey Brin are able to exercise majority voting control on the basis of just a 12% cash flow interest. Moreover, in the 2019 IPOs of the ride-hailing firm Lyft and social media giant Pinterest, the super-voting shares’ votes outweighed those attached to ordinary shares by a 20:1 ratio. A small group of US-listed companies including Google, Snap, and Under Armour have recently gone even further than this and adopted triple class share structures, which include a third class of non-voting shares.

Dual (and triple) class share structures are controversial because they enable an investor holding super-voting shares to enjoy effective voting control over the company and its board, while holding only a relatively small economic interest in the future success of its business. The general policy debate on dual class shares hangs on the conflict between two equally important considerations. On the one hand, there is the need to protect the freedom of founders and other trusted corporate leaders to implement their long-term entrepreneurial vision, unimpeded by the destabilizing short-term profit demands of hedge funds and other aggressive investors. On the other hand, there is the need to protect outside (i.e. non-controlling) minority investors from having their wealth destroyed by unaccountable and irremovable corporate controllers.
Dual (and triple) class share structures are controversial because they enable an investor holding super-voting shares to enjoy effective voting control over the company and its board, while holding only a relatively small economic interest in the future success of its business.
The general tolerance shown towards dual class shares by US regulators puts the United States in stark contrast with numerous other jurisdictions across the world including Australia, Belgium, Brazil, Germany, Italy, Japan, Spain and the United Kingdom. A common feature of all the above countries’ corporate governance frameworks is their adoption of a much more protectionist, if not altogether prohibitive, stance concerning the regulatory treatment of dual class shares in listed companies. For instance, in the United Kingdom, the London Stock Exchange’s enhanced listing regime effectively prohibits dual class shares and other discriminatory voting structures within premium-listed companies, a category that covers many of the UK’s biggest and most influential corporate names.
Interestingly, hostility towards dual class shares has recently intensified in the United States, especially within the country’s institutional investment community. For instance, the Investor Stewardship Group (ISG), which represents over 60 major institutional investors with combined assets of over $31 trillion in market value, has effectively advocated near-universal adherence by US-listed companies to a one-vote-per-share norm in its influential Corporate Governance Principles. Moreover, since 2017, S&P Dow Jones Indices has systematically excluded any new companies conducting IPOs with multiple-voting shares from its influential S&P 500 Index, which forms the benchmark for major index-linked funds’ multi-billion dollar investment portfolios. In a similar vein, the influential proxy advisory firm Institutional Shareholder Services (ISS) has a general policy of recommending that its investor clients vote against reelecting the incumbent directors of any company that offers differential voting shares as part of an initial or midstream public offering.

By contrast, certain jurisdictions that have traditionally been averse to permitting dual class shares have recently come to recognize the potential benefits of taking a more permissive stance on the matter. One of the most intriguing examples in this regard is Singapore. In June 2018, the Singapore Exchange (SGX) took the landmark step of liberalizing its formerly preclusive listing requirements with respect to discriminatory shareholder voting structures. It consequently now permit issuers to deviate from the one-vote-per-share norm subject to specific regulatory restrictions. In a similar vein, Hong Kong’s recently reformed (post-2017) listings regime has made limited allowance for dual class shares in the case of certain ‘innovative companies’, which essentially denotes firms involved in the production of new technologies or other innovations where significant R&D outlays are entailed.

Where these developments ultimately lead is currently unclear. One thing that is clear, however, is that there are no easy answers to the vexing question of whether to permit or prohibit dual class listings. For this reason, it is bound to become an increasingly challenging issue for corporate governance advisors and policymakers over the coming months and years.
Featured image credit: Photo by Markus Spiske. Available on Unsplash via the Unsplash license.